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By Chris E Chamberlain
Im not the type of investor that likes to take big changes, especially in markets like these. Im not looking to get rich quick Im just looking to get rich with certainty. That is why I focus on dividend investing. But dont mistake dividend investing with low growth just because it isnt sexy. There are a lot of companies out there that have dividend yields between 5% and 10% that are very safe and have been increasing for decades. This is actually less risky than owning bonds in this environment. Dont forget, the S&P 500 is currently yielding over 3% while 10 year Treasuries are yielding less than 2%…and unlike Treasuries, dividend payments increase over time as the companys earnings grow. Bond payments are fixed leaving the investor exposed to rising interest rates and inflation (both of which are guaranteed to happen at some point in the future).
The power of compounding dividends over time is the surest way to generate massive wealth and a powerful passive income stream. Consider the following example using a top dividend paying stock as an example. 100 shares of JNJ 20 years ago wouldve cost about $6,750. By reinvesting those dividends back into the stock, youd have over 1200 shares today worth over $68,000 (10x your original investment) and paying over $2,500 in dividends a year almost 40% yield on your original investment.
Had you invested $2,000 in Pepsi stock in 1980, it would have grown to more than $200,000 by 2011, paying out over $5,500 in dividends every year. This isnt just an isolated example, either. With Phillip Morris, your $2,000 back in 1980 wouldve grown to over $670,000 today and would be paying over $9,600 a year in dividends.
There are hundreds of examples like this and most of them are well known companies that were well known back in 1980that wouldve been likely candidates for dividend increases over time back then.
Since the 1960s Pfizer has increased its dividend 4200%someone who had reinvested those dividends wouldve earned over 13,000%. Johnson & Johnson increased its dividend 9,700%Coca-Cola increased its dividend 4,700%. Dividends are truly the backbone of investor returns over time.
The best part is, these massive creations of wealth were all in well-known companies that were very well-known even 20 years ago. Its not like you wouldve had to spot the next Microsoft or Google to make this kind of money. These stocks were dividend powerhouses back then! In fact, theres an excellent list of such stocks that I refer everyone to thats really interested in dividend investing. Its called the Dividend Aristocrats and its a list of those S&P 500 companies that have raised their dividends for at least 25 years in a row. Dividend payouts, especially increasing dividend payouts, reflect managements confidence in the sustainability of cash flow generation. Also, dividends are the ultimate form of transparency – returning the cash to the people that own itthe shareholders. The bottom line is dividends are an important sign of a healthy company
For this reason stocks with higher dividends, for years, were considered safer investments. Similar to a company that pays higher salaries and gives higher raises over time. A shift occurred in the 1990s, though, as companies with extremely high growth prospects (but little, or no, earnings) came to dominate the landscape. Thats not to say these companies were completely without meritthe internet (and technology, in general) ushered in a new paradigm of truly transformational companies with spectacular growth prospects.
But making a bet on a companys future growth is exactly thata bet on future growth. While, dividends reflect the health of a companys growth right now.
About the Author: http://www.DividendInvesting101.com is dedicated to finding the best investment opportunities among
top dividend paying stocks
. Systematically investing in the best dividend paying stocks is absolutely one of the best ways to build real wealth – as well as a powerful passive income stream.